A federal court has blocked enforcement of a requirement that most restaurants and other small businesses report who owns them to the U.S. Department of the Treasury by Jan. 1.
Failure to comply could have exposed covered companies to fines of up to $10,000, though the federal agency charged with policing the first-of-its-kind mandate indicated that it would provide an unofficial grace period to foster compliance.
The requirement applies to most U.S. limited liability companies, or LLCs, as well as small corporations. Concerns that employ at least 20 people or have at least $5 million in revenues are exempted, as are 23 specific types of companies.
Covered operations formed prior to Jan. 1, 2024, are required to reveal who controls them—what Treasury calls the beneficial ownership information, or BOI—in a filing submitted to the department no later than Jan. 1, 2025. Companies that were formed since Jan. 1 had 90 days after they were created to provide Treasury with the info.
The mandate is intended to help Treasury officials catch criminals who use legitimate businesses to launder money from illegal activities like drug dealing, or to mask illicit activities by conducting them behind the front of an actual business.
The department has stressed that control over the collected data would be tight, with info accessed solely in the course of formal investigations rather than being routinely analyzed in hopes of revealing criminal activity. Yet critics voiced fears that the process would become a backdoor way for Treasury enforcement agents to snoop on small businesses.
A group led by a police-supplies retailer called Texas Top Cop Shop sued U.S. Attorney General Merrick Garland and the U.S. Department of Justice to block enforcement of the law. The challenge was filed in the U.S. District Court for the Eastern District of Texas.
Late Tuesday, U.S. District Judge Amos Mazzant sided with the plaintiffs and enjoined Justice from policing the disclosure requirement.
Mazzant ruled that the federal law underlying the mandate is unconstitutional because Congress had exceeded its authority and encroached on responsibilities that lie with the states. He contended that LLCs and corporations are chartered by states, not the federal government, and that Congress should not interject itself into the process by requiring disclosures of ownership.
What’s more, Mazzant wrote, implied in the creation of the covered companies is a guarantee of anonymity. Entrepreneurs who wish to remain unidentified would now be denied that privacy, the judge contended.
The ruling will likely spare restaurants from a year-end scramble to meet Treasury’s BOI filing requirements. Although the disclosure mandate has been pending for years, many covered businesses are unaware of the obligation, as Treasury itself has acknowledged. The department has convened webinars and distributed information in an effort to bolster awareness.
An explanatory webinar was hosted by the National Restaurant Association for the same reason.
“The complexities of the ‘beneficial ownership information’ reporting mandate have created confusion for small business restaurant owners who would have been expected to report or face consequences,” Sean Kennedy, the association’s EVP of public affairs, said in response to Tuesday’s decision.
That decision blocked enforcement of the Corporate Transparency Act, the law that created the requirement. But the BOI requirements technically remain in place. Treasury could conceivably rewrite the applicable regulations. The district court’s ruling could also be overturned upon appeal.
“We’re pleased that the court issued the preliminary injunction and hope that the new Department of Treasury leadership will reconsider the Corporate Transparency Act, based on the court’s finding that it is likely unconstitutional,” said Kennedy.
Consumer Choice Center, a group that characterizes itself as an advocate for the customers of small businesses, expressed similar sentiments.
"The reporting requirements of the Corporate Transparency Act are a slow-roll attack on financial privacy for ordinary people via a mass doxxing of LLCs,” Deputy Director Yael Ossowski said in a statement. “For small businesses and consumers that rely on them, this injunction removes the risk inherent in a centralized database of Americans' sensitive financial information and personal data that would be prone to abuse.”
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